Hasbro (HAS)

Royalties, Research and Development

        Our success is dependent on innovation through the continuing development of new products and the redesign of existing items for continued market acceptance. In 2004, 2003 and 2002, we spent $157,162, $143,183 and $153,775, respectively, on activities relating to the development, design and engineering of new products and their packaging (including items brought to us by

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independent designers) and on the improvement or modification of ongoing products. Much of this work is performed by our internal staff of designers, artists, model makers and engineers.

        In addition to the design and development work performed by our own staff, we deal with a number of independent toy and game designers for whose designs and ideas we compete with other toy and game manufacturers. Rights to such designs and ideas, when acquired by us, are usually exclusive and the agreements require us to pay the designer a royalty on our net sales of the item. These designer royalty agreements in some cases also provide for advance royalties and minimum guarantees.

        We also produce a number of toys under trademarks and copyrights utilizing the names or likenesses of characters from familiar movies, television shows and other entertainment media, for whose rights we compete with other toy and game manufacturers. Licensing fees for these rights are generally paid as a royalty on our net sales of the item. Licenses for the use of characters are generally exclusive for specific products or product lines in specified territories. In many instances, advance royalties and minimum guarantees are required by these license agreements. In 2004, 2003 and 2002, we incurred $223,193, $248,423 and $296,152, respectively, of royalty expense. A portion of this expense relates to amounts paid in prior years as royalty advances. This expense will vary depending upon the timing of movie releases. In 2005, we expect royalty expense to increase due to the scheduled release of STAR WARS EPISODE III: REVENGE OF THE SITH. Under the terms of currently existing license agreements, in certain circumstances, we may be required to pay an aggregate of $154,100 in guaranteed or minimum royalties or other licensing fees in 2005 and thereafter. We have $80,167 of prepaid royalties, which are a component of prepaid expenses and other current assets on our balance sheet. Included in other assets is $87,188 representing the long-term portion of royalty advances already paid. Of the unpaid guaranty, we may be required to pay approximately $107,000, $21,600, $10,200, $7,600, $5,600 and $2,100 in 2005, 2006, 2007, 2008, 2009, and 2010 and thereafter, respectively. Amounts paid and advances to be paid relate to anticipated revenues in the years 2005 through 2018.